Economics Dictionary of ArgumentsHome
| |||
|
| |||
| Credit expansion: Credit expansion in economics refers to the increase in the availability of loans and credit within an economy, typically driven by lower interest rates or monetary policy actions. It stimulates investment and consumption, boosting economic activity, but excessive expansion can lead to inflation, asset bubbles, or financial instability. See also Inflation, Credit, Money supply._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
| Author | Concept | Summary/Quotes | Sources |
|---|---|---|---|
|
Murray N. Rothbard on Credit Expansion - Dictionary of Arguments
Rothbard III 991 Credit expansion/Rothbard: If inflation is any increase in the supply of money not matched by an increase in the gold or silver stock available, the method of inflation just depicted is called credit expansion - the creation of new money-substitutes, entering the economy on the credit market. As will be seen below, while credit expansion by a bank seems far more sober and respectable than outright spending of new money, it actually has far graver consequences for the economic system, consequences which most people would find especially undesirable. This inflationary credit is called circulating credit, as distinguished from the lending of saved funds - called commodity credit. Inflation/Rothbard: Credit expansion has, of course, the same effect as any sort of inflation: prices tend to rise as the money supply increases. Like any inflation, it is a process of redistribution, whereby the inflators, and the part of the economy selling to them, gain at the expense of those who come last in line in the spending process. Inflation: This is the charm of inflation - for the beneficiaries - and the reason why it has been so popular, particularly since modern banking processes have camouflaged its significance for those losers who are far removed from banking operations. The gains to the inflators are visible and dramatic; the losses to others hidden and unseen, (…). >Inflation/Rothbard. Rothbard III 992 Investment/consumption: Inflation also changes the market's consumption/investment ratio. Superficially, it seems that credit expansion greatly increases capital, for the new money enters the market as equivalent to new savings for lending. Since the new "bank money" is apparently added to the supply of savings on the credit market, businesses can now borrow at a Iower rate of interest; hence inflationary credit expansion seems to offer the ideal escape from time preference, as well as an inexhaustible fount of added capital. Actually, this effect is illusory. On the contrary, inflation reduces saving and investment, thus Iowering society's standard of living. It may even cause large-scale capital consumption. 1) In the first place, as we just have seen, existing creditors are injured. This will tend to discourage lending in the future and thereby discourage saving-investment. 2) Secondly (…) the inflationary process inherently yields a purchasing-power profit to the businessman, since he purchases factors and sells them at a later time when all prices are higher. Rothbard III 994 Market Interest rates: The credit expansion reduces the market rate of interest. This means that price differentials are Iowered, and, (…), Iower price differentials raise prices in the highest stages of production, shifting resources to these stages and also increasing the number of stages. >Production structure/Rothbard. As a result, the production structure is lengthened. The borrowing firms are led to believe that enough funds are available to permit them to embark on projects formerly unprofitable. Free market: On the free market, investment will always take place first in those projects that satisfy the most urgent wants of the consumers. Then the next most urgent wants are satisfied, etc. The interest rate regulates the temporal order of choice of projects in accordance with their urgency. A Iower rate of interest on the market is a signal that more projects can be undertaken profitably. Equilibrium: Increased saving on the free market leads to a stable equilibrium of production at a Iower rate of interest. Credit expansion: But not so with credit expansion: for the original factors now receive increased money income. In the free-market example, total money incomes remained the same. The increased expenditure on higher stages was offset by decreased expenditure in the Iower stages. The "increased length" o fthe production structure was compensated by the "reduced width." But credit expansion pumps new money into the production structure: aggregate money incomes increase instead of remaining the same. The production structure has lengthened, but it has also remained as wide, without contraction of consumption expenditure. Rothbard III 995 Production structure/inflation/Rothbard: The owners of the original factors, with their increased money income, naturally hasten to spend their new money. >Factors of production/Rothbard. They allocate this spending between consumption and investment in accordance with their time preferences. Let us assume that the time-preference schedules of the people remain unchanged. >Time preference/Rothbard. This is a proper assumption, since there is no reason to assume that they have changed because of the inflation. Production now no longer reflects voluntary time preferences. Business has been led by credit expansion to invest in higher stages, as ifmore savings were available. Since they are not, business has overinvested in the higher stages and underinvested in the Iower. Consumers act promptly to re-establish their time preferences – their preferred investment/consumption proportions and price differentials. The differentials will be re-established at the old, higher amount, i.e., the rate of interest will return to its free-market magnitude. As a result, the prices at the higher stages of production will fall drastically, the prices at the Iower stages will rise again, and the entire new investment at the higher stages will have to be abandoned or sacrificed. Rothbard III 997 Investments: (…) bank credit expansion cannot increase capital investment by one iota. Investment can still come only from savings. >Money supply/Rothbard, >Saving/Rothbard, >Interest rate/Rothbard. Rothbard III 998 Money supply: an increase in the supply of money does Iower the rate of interest when it enters the market as credit expansion, but only temporarily. In the long run (and this long run is not very "long"), the market re-establishes the free-market time-preference interest rate and eliminates the change. In the long run a change in the money stock affects only the value of the monetary unit. Business cycle/Rothbard: This process - by which the market reverts to its preferred interest rate and eliminates the distortion caused by credit expansion - is, moreover, the business cycle! Rothbard III 1010 Credit expansion/Rothbard: Limitations: How does the narrow range of a bank's clientele limit its potentiality for credit expansion? The newly issued money-substitutes are, of course, Ioaned to a bank's clients. The client then spends the new money on goods and services. The new money begins to be diffused throughout the society. Eventually - usually very quickly - it is spent on the goods or services of people who use a different bank. Example: Suppose that the Star Bank has expanded credit; the newly issued Star Bank's notes or deposits find their way into the hands of Mr. Jones, who uses the City Bank. Two alternatives may occur, either of which has the same economic effect: (a) Jones accepts the Star Bank's notes or deposits, and deposits them in the City Bank, which calls on the Star Bank for redemption; or (b) Jones refuses to accept the Star Bank's notes and insists that the Star client - say Mr. Smith - who bought something from Jones, redeem the note himself and pay Jones in acceptable standard money. Money-substitutes: Thus, while gold or silver is acceptable throughout the market, a bank's money-substitutes are acceptable only to its own clientele. Clearly, a single bank's credit expansion is limited, and this limitation is stronger (a) the narrower the range of its clientele, and (b) the greater its issue of money-substitutes in relation to that of competing banks. Rothbard III 1011 Bankruptcy: (…), the greater the degree of relative credit expansion by any one bank, the sooner will the day of redemption - and potential bankruptcy - be at hand and they are impelled to spend a great proportion of the new money. Some of this increased spending will be on one another's goods and services, but it is clear that the greater the credit expansion, the greater will be the tendency for their spending to "spill over" onto the goods and services of nonclients. This tendency to spill over, or "drain," is greatly enhanced when increased spending by clients on the goods and services of other clients raises their prices. In the meanwhile, the prices of the goods sold by non-clients remain the same. As a consequence, clients are impelled to buy more from nonclients and less from one another; while nonclients buy less from clients and more from one another. The result is an "unfavorable" balance of trade from clients to nonclients.(1) Bank reserve: The purpose of banks' keeping any specie reserves in their vaults (assuming no legal reserve requirements) now becomes manifest. It is not to meet bank runs - since no fractional-reserve bank can be equipped to withstand a run. It is to meet the demands for redemption which will inevitably come from nonclients. 1. In the consolidated balance ofpayments of the clients, money income from sales to nonclients (exports) will decline, and money expenditures on the goods and services of nonclients (imports) will increase. The excess cash balances of the clients are transferred to non-clients._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
||
> Counter arguments against Rothbard
> Counter arguments in relation to Credit Expansion
Authors A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Concepts A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
